An Evaluation of the Transmission of International Wheat Prices Into Kenya’s Domestic Market

Abstract

The prices of most food commodities in the international market have increased in the recent past. Thus, there is need to understand, the extent to which the increase in food prices is transmitted to the domestic market from the world market. Little information is available on the degree of transmission of world wheat prices into the domestic market in Kenya. The study seeked to evaluate the transmission of international wheat prices to the Kenyan domestic market. The purpose of the study was to evaluate the transmission of international wheat price into domestic markets in Kenya. The study employed an Error Correlation Model (ECM) on monthly wholesale prices for the period 2002-2014 to evaluate the transmission of international wheat prices into Kenya’s domestic market. The international wheat price data was obtained from FAO GIEWS, while domestic wheat prices in Kenya was collected from the Ministry of Agriculture, Livestock and Fisheries. The study found out that there exist a long-run steady state equilibrium between the Ukrainian and the Kenyan wheat prices. The long-run elasticity of price transmission is estimated at 0.78 to show that 78 percent of the changes in the Ukrainian wheat prices are transmitted to the Kenyan domestic market. The speed of adjustment is estimated at -0.08 which implies that it takes about 13 months for the wheat price changes in Ukraine to be fully transmitted to the Kenyan market. The Kenyan government should improve infrastructure in the rural areas to allow for easy movement of goods and services. The government should create conducive environment for local production of wheat. It should also promote production of other staple foods to supplement wheat in case of higher prices. The study also recommends that the government should create competition in grain handling in order to reduce cost and time of handling.